United-Guardian (NASDAQ:UG) Is Investing Its Capital With Increasing Efficiency
Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. And in light of that, the trends we're seeing at United-Guardian's (NASDAQ:UG) look very promising so lets take a look.
Return On Capital Employed (ROCE): What is it?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for United-Guardian:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.39 = US$4.3m ÷ (US$12m - US$1.5m) (Based on the trailing twelve months to June 2021).
So, United-Guardian has an ROCE of 39%. That's a fantastic return and not only that, it outpaces the average of 18% earned by companies in a similar industry.
See our latest analysis for United-Guardian
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating United-Guardian's past further, check out this free graph of past earnings, revenue and cash flow.
The Trend Of ROCE
We're pretty happy with how the ROCE has been trending at United-Guardian. The data shows that returns on capital have increased by 68% over the trailing five years. The company is now earning US$0.4 per dollar of capital employed. Speaking of capital employed, the company is actually utilizing 23% less than it was five years ago, which can be indicative of a business that's improving its efficiency. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.
In Conclusion...
From what we've seen above, United-Guardian has managed to increase it's returns on capital all the while reducing it's capital base. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 29% to shareholders. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.
If you'd like to know more about United-Guardian, we've spotted 3 warning signs, and 1 of them makes us a bit uncomfortable.
If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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